Colefax has now released its final results for the year ended 2016.
Revenues increased when compared to 2015 as a £173K decline in decorating revenue was more than offset by a £170K growth in furniture revenue and a £100K increase in product revenue. Depreciation was up £159K but cost of inventories decreased by £1.3M to give a gross profit £1.3M above that of last year. Operating lease rentals increased by £461K and other distribution and marketing costs were up £316K. We also see a £669K negative swing to exchange losses but other admin costs fell by £248K which meant that the operating profit was flat compared to last year. Tax costs were slightly higher, however, so the profit for the year came in at £3.5M, a decline of just £67K year on year.
When compared to the end point of last year, total assets increased by £3M to £39.4M, driven by a £3.2M increase in cash and a £584K growth in screens and originations, partially offset by a £401K decline in other receivables. Total liabilities also increased during the year as a £772K decrease in trade payables was more than offset by a £604K growth in forward currency contract liabilities, a £269K increase in accruals and a £249K growth in payments received on account. The end result was a net tangible asset level of £26.3M, an increase of £2.6M year on year.
Before movements in working capital, cash profits increased by £135K to £7.2M. There was a broadly neutral working capital position compared to an inflow last year and after tax payments fell by £322K there was a net cash from operations of £5.9M, a decline of £1.2M year on year. The group spent £2.3M to give a free cash flow of £3.6M. Of this, £324K was spent on their own shares and £483K on dividends which meant that the annual cash flow was £2.8M and the cash level at the year-end was £10.1M.
The year has become progressively more challenging in all of the group’s major markets. Group profits for the first six months were up 13% to £3.3M but for the second half they were down 19% at £1.8M. Different factors have affected different markets, notably the forthcoming election in the US, higher stamp duty in the UK and weak consumer confidence in Europe. Since the year-end, the Brexit vote has created uncertainty in both the UK and Europe. At this stage it is too early to judge the extent to which the group will be affected but in the US they are experiencing more difficult trading conditions attributed to concern over the November presidential election.
In the product division, sales in the fabric business were flat but reduced by 3% on a constant currency basis and operating profit declined by 9.5% to £4.5M reflecting a generally challenging sales environment. Sales in the UK were flat during the year which was attributed to the ongoing impact of the increase in stamp duty on the high end housing market with group sales typically lagging activity. They believe that the slowdown in high end housing transactions has been partly offset by an increase in refurbishment activity on existing homes.
Sales in the US, by far the largest market, increased by 3% but were down 3% on a constant currency basis. There was a marked difference between the first and second half of the year with first half sales down 1% and second half down by 5%. The group are attributing the slowdown to concern about the forthcoming presidential election in November which has made consumer cautious at the luxury end of the market. In the current financial year they are planning to open their new showrooms in Boston and Atlanta which will give them direct control over these territories.
Sales in Continental Europe decreased by 8% on actual terms and 4% on a constant currency basis. The performance by country was very mixed but there was no overall sign of a strong recovery despite significant monetary easing by the Central Bank. In France the economy remained difficult and sales were down 8% and in Germany they were down 10% but in Italy they increased by 9%. In the smaller markets the picture was more encouraging but overall trading conditions were challenging.
Sales in the ROW increased by 4% to £2M. The Middle East, Australia, Russia and China are the largest markets but are still a relatively small part of overall sales and represent an opportunity if current market conditions improve.
Sales of furniture increased by 7% to £2.6M and operating profit increased by £92K to £263K, aided by a contract order at the start of the year. The majority of the sales are in the UK centred on London and as with the fabric business, market conditions were relatively difficult during the year.
Decorating sales fell by 2% to £7.9M but operating profits were £221K compared to a loss of £139K for the prior year. The improvement reflects a change in mix between decorating work and low margin antique sales where trading conditions have been very challenging. This autumn, the decorating division will be moving to new premises on Pimlico Road. This move represents a significant change for the business and the board are optimistic about the benefits of the new location. As part of the move they will significantly reduce the scale of their antiques operation which has experienced increasingly tough trading conditions in recent years. The decorating business had a healthy level of deposits at the end of the year.
With almost 75% of group sales made in overseas markets the devaluation in sterling represents a growth opportunity but for the current year and a portion of next, the group hedged their exposure and therefore will not benefit from the post-Brexit weakness in the currency. Despite the ongoing uncertainty the group will continue to invest in the business with confidence and have a significant year of capex with new US showrooms in Atlanta and Boston and a new Decorating division showroom and offices in London.
At the year-end, the net cash position stood at £10.1M compared to £6.9M at the end of the prior year. At the current share price the shares are trading on a PE ratio of 14.1 but this increases to 17 on next year’s consensus forecast. After an increase of 5% in the total dividend the shares are yielding 1%, increasing to 1.1% on next year’s forecast.
Overall then this has been a bit of a mixed year for the group. Profits were broadly flat but net assets did improve. The operating cash flow declined but this was due to an increase in inventories compared to a reduction last year and cash profits increased with a decent amount of free cash being generated. Unfortunately, after a strong start the performance deteriorated as the year progressed. The Furniture division gave a good performance after a contract order was received at the start of the year and the decorating division swung to a profit due to a better mix with reduced antique business.
The fabric division saw profits decline, however, which is being attributed to consumer concerns over the upcoming US elections, the UK stamp duty hike and general weak European consumer confidence. The depreciation of sterling will eventually be a bonus of currencies remain as they are but this will not be seen this year due to the fact the group has hedged against moves. The forward PE of 17 and yield of 1.1% don’t discount enough of the slowing market in my view and I am not rushing to buy the shares.
On the 15th September the group released an AGM statement where they stated that since the end of the year, trading conditions have remained relatively challenging in all of their main markets. In the core Fabric division, sales for the first four months of the year are up 4% but were down 7% on a constant currency basis. Overall this was broadly in line with expectations.